Italian MBO Overview

Over the last few years the Italian buyout market has grown significantly in size, number and level of experienced market participants, such as equity sponsors, lenders and advisors. Total funds raised in 2000 grew by 33 per cent, reaching Lira5.663 billion, according to the Italian venture capital association, AIFI, and around 40 per cent of this was dedicated to buyouts. However, good buyout opportunities are not abundant and limited growth is expected in the volume of transactions for 2001. Angela Sormani reports.

The market is now under pressure with an increased amount of capital available for investment and a growing number of players fighting for deals in a small space. The fall in the number of buyouts last year (in 1999, E830 million was invested in 35 deals, while in 2000, the number fell to E757 million in 14 companies), bears testament to this and market professionals are voicing concern. “It will be a very tough operating environment with all the competitors that are setting up in the region,” says Guido Belli of Bridgepoint Capital.

“While there is a lot of money available for investment in Italy at the moment, opportunities are not flourishing,” says Andrea Negri of Advent International. Deal flow appears to have dried up, quashing the hopes that were raised for the market after Morgan Grenfell Private Equity’s high profile buyout of Piaggio in 1999. A deal of this size is something that players could not have envisaged two or three years ago, but there have been no significant deals that are anywhere near this stature over the past few months. This is blamed, in part, on most offerings being overpriced, says Negri.

However, there are some exceptions such as automotive giant Fiat, which is in the process of restructuring, which may spark opportunities. In January last year the Fiat Group, as part of its ongoing strategy to focus on core activities, decided to review all available strategic alternatives regarding its auto parts plant, Magnetti Marelli. This included the possible divestiture of certain of its business lines or potential alliances with other leaders in the automotive components industry. In February, Doughty Hanson scored its first Italian acquisition, said to be one of the largest leveraged acquisitions to be completed in the Italian market. The firm paid some E428 million for Fiat Lubricants Group (FL Group), one of Europe’s largest producers and distributors of automotive and industrial lubricants.

One of the more outstanding deals of 2000 was Clayton, Dubilier & Rice’s investment in Italtel, Telecom Italia’s telecoms switching equipment and systems integration subsidiary, a transaction valued at approximately E1 billion. CD&R’s Fund VI provided E285 million of equity in exchange for 50.1 per cent of Italtel, while Cisco and Telecom Italia each own around 19 per cent, Advent International holds nine per cent and Brera Capital two per cent.

Large pan-European funds that are particularly active at the moment in the Italian market include Doughty Hanson, Bridgepoint Capital, Carlyle Group, CVC Capital Partners, 3i, and Schroders. The Italian market has also been attracting major US firms such as Vestar Capital Partners and Bank of America, which set up base in Milan earlier this year. Prominent domestic players in the mid-market are B&S Electra and Investitori Associati that last year closed its third fund, Investitori Associati Private Equity fund III at L500 billion. A transaction involving both parties at the end of last year was Investitori Associati II’s acquisition of Guala Closures SA, manufacturer of safety closures for alcoholic beverages from B&S Electra for E150 million in cash plus a profit-related payment of L9.6 million.

Commenting on features typical of Italian deals, Andrea Gianola of Investitori Associati, says: “LBO transactions in the Italian market have always been characterised by a high degree of flexibility. The Italian economy is dominated by small and medium sized companies closely controlled by the founders or their families, and buyouts of these companies typically involve flexible structures to accommodate the needs of the various family members.” He adds that a number of large Italian and foreign industrial groups are currently restructuring and disposing of non-core assets, which may be targets of buyouts but are sometimes in turnaround situations and therefore require creative structures to complete the deal.

There continues to be a growing interest in Italian buyouts from domestic and foreign financial institutions and Gianola is confident the Italian market will become more global in line with international market practice. Whether the supply of deals will meet the demand remains to be seen.

Legal issues

There are unresolved legal issues that continue to hold the Italian market back as far as LBOs are concerned. There is a very hostile environment at the moment with what some players describe as contradictory judgements in terms of financial assistance, says Francesco Portolano of Baker McKenzie in Rome. According to paragraph 1 of section 2358 of the Italian Civil Code, a company can neither provide loans nor grant guarantees for the purchase of its own shares. In this case, the term “guarantees” includes financial assistance such as private equity commitments. However, in 90 per cent of cases the only real issue arises in the case of a merger LBO. If the target and buyer remain separate, in 99 per cent of cases, says Portolano, it shouldn’t be an issue.

AIFI recently proposed a draft amendment of this law in order to facilitate the LBO transaction. However, no significant developments have been made and the issues remain unresolved with no clear definition in Italy of the term “financial assistance”.

The law is interpreted by most as detrimental to LBOs. Portolano, however says that the issue was blown out of proportion with a particular case that went to court where there was no financial institution involved and the investors were accused of depleting a company’s resources. This case was taken as an example of LBOs being illegal in Italy. Portolano stresses however that this is not always the case and is only due to a lack of a clear statement to point out when an LBO is legal, that is in the case of a respectable business institution with a genuine purpose.

Although the current law is, in a certain respect, an impediment to the development of the Italian LBO market, Portolano says it has not stopped the flow of LBO transactions. “Managers know there is a slight risk and legal implications,” he says “But there are ways to minimise the risk if there is a true business purpose and if it is to improve the cash flow of a business.” He adds that the Italian private equity market is eager for a change of this law. Originally, it was hoped that there would be developments by September. However, it looks unlikely that anything will happen for at least another year, perhaps longer.